Crown Castle International Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010; filed November 5, 2010. The company owns, leases or manages approximately 23,900 wireless communications towers in the U.S., Canada and Australia. Site rental is the core business, supplemented by network services and other offerings.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Change |
|---|---|---|---|
| Net revenues | $481.9 million | $429.1 million | +12% |
| Site rental revenue | $437.1 million | $396.5 million | +10% |
| Network services and other revenue | $44.8 million | $32.6 million | +37% |
| Operating income | $156.0 million | $118.8 million | +31% |
| Adjusted EBITDA | $306.1 million | $260.5 million | +18% |
| Net loss attributable to CCIC stockholders | $135.0 million | $31.6 million | Loss increased |
| Net loss per diluted common share | $0.49 | $0.13 | Loss increased |
Operating margin improved to approximately 32% from 28%. Site rental gross margin was 74% in Q3 2010, up from 71%, reflecting high incremental margins on new tenant additions. Net losses were driven primarily by a $104.4 million interest-rate-swap loss, a $71.9 million loss on debt purchases and early retirement, higher interest expense and reduced tax benefits.
| Metric | Nine months 2010 | Nine months 2009 | Change |
|---|---|---|---|
| Net revenues | $1.382 billion | $1.242 billion | +11% |
| Operating income | $419.2 million | $314.5 million | +33% |
| Adjusted EBITDA | $860.5 million | $749.8 million | +15% |
| Net loss attributable to CCIC stockholders | $351.8 million | $132.5 million | Loss increased |
| Operating cash flow | $407.7 million | $393.7 million | +$14.0 million |
| Capital expenditures | $148.3 million | $111.3 million | +$37.0 million |
As of September 30, 2010, cash and cash equivalents were $304.0 million, excluding $212.1 million of restricted cash. Debt and other obligations totaled $6.616 billion, including $627.3 million of variable-rate bank debt and approximately 90% fixed-rate debt. Interest-rate swap liabilities were $443.3 million at fair value, or approximately $460.0 million on a cash-settlement basis. Total equity was $2.381 billion and redeemable preferred stock was $316.3 million.
Material changes versus the prior comparable period
- Revenue growth was led by new tenant additions, lease escalations and renewals. New tenant additions contributed approximately 8% to Q3 site rental growth and approximately 7% to nine-month growth.
- Adjusted EBITDA increased substantially because of revenue growth and the high incremental margins of tower leasing.
- Interest expense increased 11% in Q3 and 12% for the nine-month period, partly because of refinancing activity and amortization of interest-rate swaps.
- The company recorded materially larger debt-retirement losses and interest-rate-swap losses than in the prior year, more than offsetting operating improvements.
- Cash flow from investing activities increased to a $298.5 million use, reflecting higher capital expenditures, the NewPath acquisition and investments. Financing activities used $571.2 million, including debt purchases, share repurchases, financing costs and swap settlements.
- The company acquired NewPath Networks in September 2010 for approximately $128 million in cash. NewPath had 35 distributed antenna system networks in operation or under construction.
- The company issued $3.45 billion of 2010 Tower Revenue Notes and used proceeds primarily to refinance the 2005 and 2006 Tower Revenue Notes, extending and laddering maturities.
Outlook, risks and unusual items
- Management expects site rental revenue growth of approximately 7% to 8% from full-year 2010 to 2011, supported by wireless network expansion, mobile data usage and smartphone adoption.
- Management expects full-year 2010 operating cash flow to be at least comparable to 2009 operating cash flow of $571.3 million, while acknowledging an estimated working-capital reduction of approximately $175 million.
- Management expects more than $300 million of capital expenditures in 2011, with sustaining capital expenditures of approximately $20 million to $25 million.
- Management stated that cash on hand, operating cash flow and the $400 million undrawn revolver should cover the next 12 months of principal payments, capital expenditures and swap obligations. No significant debt maturities are expected before the 2014 term-loan maturity of approximately $627.3 million.
- The company had no financial covenant violations. At September 30, 2010, the consolidated leverage ratio was 5.4 versus a maximum of 7.50, and the consolidated interest coverage ratio was 3.0 versus a minimum of 2.00.
- Forward-starting swaps with approximately $2.9 billion of notional value no longer represented economic hedges for certain refinanced debt. Their fair-value changes were recorded in earnings, creating significant quarterly volatility. A 100-basis-point decrease in LIBOR was estimated to reduce earnings by approximately $171 million and increase the cash-settlement liability by approximately $174 million.
- The 2010 Tower Revenue Notes have anticipated repayment dates in 2015, 2017 and 2020. If not repaid by the applicable dates, additional interest of approximately 5% per year may accrue and excess cash flow may be directed to principal repayment.
- Federal deferred tax benefits were subject to a full valuation allowance because of the company’s history of tax operating losses. Management could recognize only limited benefits from discrete events, including the NewPath acquisition.
- Management reported no material changes to previously disclosed risk factors, no material changes in internal control over financial reporting and no material pending litigation expected to adversely affect consolidated results.
Important facts for investors to verify
- Reconcile Adjusted EBITDA to GAAP results and distinguish its exclusion of interest, depreciation, swap losses, debt-retirement losses and other items.
- Review the timing, cash requirements and valuation sensitivity of the approximately $460 million interest-rate-swap settlement obligations.
- Assess refinancing and maturity-extension assumptions for the 2010 Tower Revenue Notes, including potential 5% additional interest and excess-cash-flow sweeps.
- Evaluate liquidity after planned 2011 capital expenditures exceeding $300 million, share repurchases, acquisitions and debt-related payments.
- Monitor customer concentration: Verizon Wireless, AT&T, Sprint Nextel and T-Mobile accounted for 72% of consolidated revenue.
- Assess execution and returns from the NewPath DAS acquisition and the company’s increased land, tower and DAS investments.
- Consider the effect of tax valuation allowances on future tax benefits and reported earnings.